How Conventional Loans Work for Rental Properties
Conventional financing through Fannie Mae and Freddie Mac is the standard path for purchasing investment properties. Government-backed programs like FHA, VA, and USDA are restricted to owner-occupied homes, which makes conventional the go-to option for investors looking to build a rental portfolio with traditional mortgage financing.
The trade-off is straightforward: lenders view investment properties as higher risk because borrowers are statistically more likely to walk away from a rental than a primary residence during financial hardship. That increased risk translates to larger down payments, higher interest rates, stricter credit thresholds, and mandatory cash reserves. None of these are deal-breakers — they're just the cost of doing business as a real estate investor.
Investment Property Down Payment Requirements
The minimum down payment for an investment property depends on the number of units and the loan type. Unlike primary residence purchases where 3-5% is possible, investment properties start at 15% and go up from there. Putting more down reduces your rate and eliminates PMI entirely at 20%.
Gift funds are restricted for investment properties
Unlike primary residence purchases, Fannie Mae and Freddie Mac do not allow gift funds for investment property down payments. Every dollar must come from the borrower's own documented assets — savings, investment accounts, or proceeds from another property sale. See full down payment source rules →
Using Rental Income to Qualify
One of the biggest advantages of conventional investment property loans is the ability to use projected rental income from the property you're purchasing to help qualify. Lenders don't use the full market rent — they apply a 25% vacancy factor, meaning only 75% of the gross rental income counts toward your qualifying income.
How the 75% Rule Works
Example: $1,800/month Market Rent
Gross rent: $1,800/month
75% qualifying rent: $1,350/month
Monthly PITIA payment: $1,500/month
Net impact on DTI: -$150/month (counts as $150 debt obligation)
If the rent were $2,200 instead, 75% = $1,650, which exceeds the $1,500 payment by $150 — that $150 counts as positive income on your application.
Existing rental properties you already own
For rental properties you currently own, lenders use your most recent tax returns (Schedule E) to calculate net rental income or loss. Depreciation is added back since it's a non-cash expense. If your existing rentals show a net loss on your taxes, that loss increases your DTI when applying for a new investment property loan.
Cash Reserve Requirements
Reserve requirements are one of the biggest hurdles for investment property buyers. Lenders want to see that you have enough liquid assets to cover mortgage payments if the property sits vacant or unexpected expenses arise. The standard requirement is 6 months of PITIA for the subject property — and potentially reserves on your other financed properties too.
What Counts as Reserves
How Reserves Scale with Properties
When you own multiple financed properties, reserve requirements add up. The subject property requires 6 months. Each additional financed property beyond your primary residence typically requires an additional 2 months of reserves.
For example, if you own your primary home plus two existing rentals and are buying a third rental: 6 months on the new property + 2 months each on the existing two rentals = 10 months total reserves.
Interest Rate Adjustments (LLPAs)
Investment properties receive loan-level price adjustments (LLPAs) — essentially surcharges that increase your interest rate compared to what you'd receive on an identical loan for a primary residence. These adjustments are set by Fannie Mae and Freddie Mac and are non-negotiable regardless of which lender you use.
The practical takeaway: a borrower with a 740 score putting 25% down on an investment property might see a rate 0.50-0.75% higher than the same loan on a primary residence. A 660 score with 15% down could see a gap of 1.5% or more. Improving your credit score before applying directly reduces these adjustments.
Financing Multiple Investment Properties
Fannie Mae allows a single borrower to have up to 10 financed properties simultaneously, including their primary residence. Freddie Mac caps at 10 as well. This is the ceiling for conventional financing — beyond 10 properties, you'll need portfolio lenders or commercial financing.
DSCR loans as an alternative beyond 10 properties
Once you've reached the conventional financing limit or if your personal income can't support another property on paper, Debt Service Coverage Ratio (DSCR) loans are a popular alternative. DSCR loans qualify based on the property's rental income alone — not your personal income, tax returns, or employment. They typically require 20-25% down with slightly higher rates, but they allow unlimited properties and significantly less documentation.
LLC vs. Personal Name: What Works for Conventional
This is one of the most common questions from real estate investors, and the answer is clear: conventional loans must be taken in your personal name. Fannie Mae and Freddie Mac do not lend to LLCs, corporations, or trusts at origination. The loan must close with you as an individual borrower.
Can You Transfer to an LLC After Closing?
Technically, Fannie Mae's guidelines allow transfers to an LLC where you are the majority owner without triggering the due-on-sale clause. However, not all servicers interpret this the same way, and insurance complications can arise. Many investors do this — but it's a risk-managed decision, not a guarantee.
When You Need LLC-Based Financing
If your investment strategy requires the property to be held in an LLC from day one, conventional financing won't work. You'll need DSCR loans, portfolio lenders, or commercial financing — all of which lend directly to entities. These come with different qualification criteria and typically higher rates.
Investment Property Qualification Summary
Conventional Investment Property Requirements
Guidelines current as of 2025. Individual lender overlays may apply. Bayou Mortgage LLC · NMLS #1845349 · Equal Housing Lender.
Investment Property Loan FAQ
Questions specific to conventional financing for investment properties.
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